Irrational Exuberance

US equity markets have given up almost all of yesterday's irrational exuberance ramp gains in a perfect echo of last week's Wednesday/Thursday debacle. Bond yields are plunging - also retracing all of yesterday's losses (with 2Y -5bps since Friday now). Europe is suffering mostas EUR strengthens (as it was the most popular carry trade against China), driving USD weakness and sending European stocks lower (DAX is dumping almost 3%). And finally commodities are seeing Crude and copper crushed as PMs bounce...

"Increasingly concerned about the markets, I’ve taken more aggressive action than in 2007, the last time I soured on the equity markets. Let me explain why and what I’m doing to try to profit from what may lie ahead."

This charmed circle includes Google, Amazon, Baidu, Facebook, Saleforce.com, Netflix, Pandora, Tesla, LinkedIn, ServiceNow, Splunk, Workday, Ylep, Priceline, QLIK Technologies and Yandex. Taken altogether, their market cap clocked in at $1.3 trillion on Friday. That compares to just $21 billion of LTM net income for the entire index combined. The talking heads, of course, would urge not to be troubled. After all, what’s a 61X trailing PE among today’s leading tech growth companies?

Yes, the clock’s ticking louder, louder, warns the Economist, “only a matter of time before the next recession strikes.” Unfortunately, the “rich world is not ready.” America’s not prepared. You are not ready.

Promptly upon release of today’s GDP update, Steve Liesman and his Wall Street economist pals spent 10 minutes bloviating about why the negative print should be completely ignored. The MSM cheerleaders like Liesman and his pals cannot see the handwriting on the wall because central bank bubble finance has essentially abolished the old rules of macro-economics. Someone should tell them that an economic deja vu is about to happen... all over again!

Q. How else does this period of apparent equity overvaluation compare to equity booms in the past?

Robert Shiller: This time around, bonds and, increasingly, real estate also look overvalued. This is different from other over-valuation periods such as 1929, when the stock market was very overvalued, but the bond and housing markets for the most part weren't. It's an interesting phenomenon.

Like Houston, the financial system has been flooded with liquidity over recent years which has ultimately only had one place to flow - the financial markets. That excess liquidity has sent prices soaring to record highs despite weakting macro economic data. While many hope that the Central Banks can somehow figure out how to keeps the rivers of liquidity from overflowing their banks, history suggests that eventually bad things will happen. Of course, for investors, that translates into a significant and irreperable loss of capital.

Honest price discovery is essential to capitalist prosperity since it is the miraculous mechanism by which capital is raised from savers and investors and efficiently allocated among producers, entrepreneurs and genuine market-rate borrowers. What the central banks have generated, instead, is a casino that is blindly impelled to churn the secondary capital markets and inflate the price of existing assets to higher and higher levels - until they ultimately roll-over under their own weight. The Easy Button addiction of our central bankers is thus not just another large public policy problem. It is the very economic and social scourge of our times.